. 189
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adjusted for the aforementioned stock splits.
uted earnings in
DISC ” (178) (454)
On November 18, 1981, the Board of Directors
approved the Settlement Agreement (the “Agree-
Case: Comdisco, Inc. (B)

Part 4 Additional Cases

ment”) between the Company and participants in options under the 1981 Plan.
the Residual Incentive Compensation Plan (the Employee Stock Purchase Plan: The Comdisco, Inc.
“Plan”) related to vested residual computer interests. Employee Stock Purchase Plan (the “Plan”) was
The Plan provided in part for the allocation of a per- adopted by the Board of Directors on November 17,
centage interest in the residual value of computer 1981 and 200,000 shares were reserved for issu-
equipment to the participants. The Agreement was ance under the Plan.
approved by the stockholders on March 15, 1982
The changes in the number of shares under the
and, pursuant to the terms of the Agreement, the
option plans during 1983, 1982 and 1981 were as
Company distributed to participants in accordance
with the terms of the Plan the aggregate sum of
$3,000,000 plus 300,000 shares of the Company™s
1983 1982 1981
common stock.
(in thousands except option price
Dividends on Common Stock: Common stock divi- Number of shares: range)
dends paid were $.15 per share in 1983 compared Shares under option

Comdisco (B)
with $.11 in 1982 and $.09 in 1981. Agreements beginning of year 986 1,024 1,722
with of¬cers and directors who own approximately Options granted 308 338 ”
29% (8,358,759 shares) of the outstanding com- Options exercised (133) (376) (698)
mon stock regarding waiver of their rights to certain Shares under option
end of year 1,161 986 1,024
cash dividends payable prior to February 1, 1983,
Aggregate option
have expired and have not been renewed.
At September 30, 1983, the Company has reserved Shares under option
the following number of common shares for future beginning of year $4,967 $2,533 $3,257
issuance: Options granted 6,739 3,284 ”
Option exercised (596) (850) (724)
Shares under option
1979 Stock Option Plan 542,851
end of year $11,110 $4,967 $2,533
1981 Stock Option Plan 1,474,200
Options exercisable at
Employees Stock Purchase Plan 196,430
end of year 238 116 328
Conversion of 8% Convertible Debentures 6,849,315
Aggregate option price
of exercisable
options outstanding
at end of year $1,247 $295 $722
12. Employee Bene¬t Plans
Options available for
1979 Stock Option Plan: On November 18, 1981, future grant at end
the Board of Directors amended the Company™s of year 874 1,182 22
1979 Stock Option Plan (the “1979 Plan”) to qualify Option price range $2.45“ $2.45“ $.68“
$21.88 $9.69 $3.50
the plan as an incentive stock option plan in accor-
dance with the provisions of the Economic Recovery
Tax Act of 1981. All outstanding stock options, Pro¬t Sharing Plan: The Company has a pro¬t shar-
which retained their original option price, are eligi- ing plan covering all employees. Company contri-
ble for treatment as incentive stock options subject butions to the plan are based on a percentage of
to certain limitations as de¬ned in the amended employees™ compensation, as de¬ned. Pro¬t sharing
1979 Plan. payments are based on amounts accumulated on
1981 Stock Option Plan: On January 27, 1982, the an individual employee basis. Pro¬t sharing expense
stockholders approved the 1981 Stock Option Plan for the years ended September 30, 1983, 1982 and
(the “1981 Plan”) and 1,500,000 shares were 1981 amounted to $834,000, $590,000 and
reserved for issuance pursuant to the exercise of $489,000, respectively.
864 Case: Comdisco, Inc. (B)

134 Part 4 Additional Cases

13. Commitments and Contingent Liabilities The Company has arranged for approximately
$68,683,000 of letters of credit, primarily as guar-
At September 30, 1983, the Company was obli-
antees for certain of the Company™s sublease obli-
gated under the following commitments: (1) to pur-
gations and for future purchases of IBM equipment.
chase computer equipment in the approximate
The cost of such letters of credit range between 1„2%
aggregate amount of $58,782,000, (2) to sell
and 3„4% per annum on the amount outstanding.
computer equipment in the approximate aggregate
amount of $9,370,000, and (3) to lease computer
equipment to others with an aggregate initial term
rental of approximately $86,133,000.

Accountant Report
The Stockholders and Board of Directors, Comdisco, Inc.:
Comdisco (B)

We have examined the consolidated balance sheet of Comdisco, Inc. and subsidiaries as
of September 30, 1983 and 1982 and the related consolidated statements of earnings,
stockholders™ equity and changes in ¬nancial position for each of the years in the three-
year period ended September 30, 1983. Our examinations were made in accordance
with generally accepted auditing standards and, accordingly, included such tests of the
accounting records and such other auditing procedures as we considered necessary in
the circumstances.
In our opinion, the aforementioned consolidated ¬nancial statements present fairly the
¬nancial position of Comdisco Inc. and subsidiaries at September 30, 1983 and 1982
and the results of their operations and the changes in their ¬nancial position for each of
the years in the three-year period ended September 30, 1983, in conformity with gener-
ally accepted accounting principles applied on a consistent basis.

Peat, Marwick, Mitchell & Co.
Chicago, Illinois
November 9, 1983

Quarterly Financial Data
Summarized quarterly ¬nancial data for ¬scal years ended September 30, 1983 and
1982 is as follows:
(in thousands of dollars except for per share amounts)
Quarter Ended: December 31 March 31 June 30 September 30
1982 1981 1983 1982 1983 1982 1983 1982

Total revenue $141,011 $121,189 $132,901 $118,309 $127,455 $94,691 $141,813 $137,441
Net earnings 12,531 9,604 10,334 5,934 13,199 5,824 15,776 8,015
Net earnings per common
and common equivalent
share $.45 $.37 $.35 $.24 $.45 $.23 $.53 $.31

In the fourth quarter of ¬scal 1983, the Company generated substantial investment tax
credits, which resulted in an annual effective tax rate of 11.9%. This reduction in the
income tax rate resulted in an increase of approximately $7,430,000 in net earnings
($.25 per share) for the fourth quarter of ¬scal 1983.

W hen CompUSA™s COO, Hal Compton, wants to check out the
competition, he has only to look out his window. From there he can see a startling
cross-section of the major national retailers looking to cut into CompUSA™s surging
computer business. These tough competitors almost did CompUSA in. Under the
old, more entrepreneurial regime led by founder Nathan Morton, the chain was
sliding toward extinction after rocketing to the top of the computer retail industry.
Losses were mounting and most of the competition was offering a far better price,
if not assortment, than CompUSA. The company™s emphasis on expansion captured
most of management™s attention, at the expense of execution and productivity. Ulti-
mately, Morton was ousted and Jim Halpin, a Zayre veteran who specialized in run-
ning low-overhead operations like warehouse clubs, was brought in. Halpin purged
the corporate ranks, slashed costs, beefed up the chain™s notoriously haphazard
merchandising, exited non-core businesses (and downsized others like furniture
that didn™t merit ¬‚oor space), and beefed up others that offered more complete se-
lection and robust pro¬ts, like accessories. The results have been dramatic. “In Au-
gust of 1994, our stock was at 6 3/4, we™d lost $20 million in the previous year, and
we were completely out of cash,” Compton noted. “A year and a half later the stock
is soaring”in early May, it was just short of $35 per share!”
How has CompUSA, considered to be on the verge of bankruptcy just two years
ago, turned itself around so dramatically? According to Compton, by virtually re-
inventing the company. In the past 30 months, the company switched from ROP 1
advertising to circulars, shifted to centralized replenishment systems, invested
heavily in training in-store staff, slashed operating costs, revamped the company™s
hierarchy to push decision-making down the ladder, developed non-retail busi-
nesses that now comprise almost 50% of revenues and easily outpace retail
growth, and invested in making stores more interactive and user-friendly. Comp-
ton summed up, “There™s a major attitude shift. We used to be a top-line company,
boosting sales at all costs. Now we™re entirely bottom-line oriented; we™re not go-
ing to sell something unless it™s a profitable sale.”
Discount Store News, May 20, 19962
Research Associate Sarayu Srinivasan prepared this case under the supervision of Professor Krishna Palepu as the
basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative
situation. Copyright © 1997 by the President and Fellows of Harvard College. Harvard Business School case 9-197-
1. Run of Paper refers to generic ad space in a newspaper. ROP ads are run wherever the paper wants to ¬t them in,
as opposed to ad space purchased on a speci¬c page.
2. Adapted from Pete Hisey, “CompUSA: Back to the Bottom Line,” p. 15.

866 Case: CompUSA

136 Part 4 Additional Cases

CompUSA was founded in 1984 as Software Warehouse to sell computer hardware,
software, peripherals, and related services. In 1989 Nathan Morton, a senior vice presi-
dent of operations at The Home Depot, a successful warehouse-style hardware chain,
joined the ¬rm. Under Morton™s leadership, the renamed CompUSA pioneered the com-
puter superstore format, applying the Home Depot low-overhead, no-frills concept of
warehouse retailing”where the shop was literally nothing more than a huge warehouse
crammed to capacity with merchandise”to computer retailing, offering one-stop com-
prehensive computer shopping. CompUSA™s base strategy was to offer wide selections
of merchandise at low, competitive prices sold by knowledgeable sales representatives
in high volumes. Typical stores stocked thousands of branded hardware, software, and
accessory products, with an additional 25,000 products available by special order. Low
margins were characteristic of the high volume, deep discount strategy and the company
purchased inventory in large quantities at discount from vendors. Clients included indi-

viduals, businesses, government, and educational institutions. Stores averaged $30 mil-
lion to $40 million worth of sales per year.3
CompUSA pursued voracious growth during the early 1990s (averaging 75 percent
p.a.), expanding from two stores in 1989 to 66 stores in 1993. Multiple stores were
opened in major markets where demand was high enough to absorb promotion, distribu-
tion, and administrative costs.4 New store openings were preceded by concentrated ad-
vertising campaigns and promotions. Located in suburbs and city outskirts, average
stores measured 27,000 square feet and sold products for half of list price, driving other
retailers to cut prices too. CompUSA encouraged impulse purchases through a strategic
store layout which guided shoppers deeper into the store, exposing them to a wider va-
riety of merchandise and eye-catching displays. Growth was spectacular. In 1991 the
¬rm completed an IPO, becoming the ¬rst computer superstore chain to court the Mar-
kets. By 1993 however, the relentless focus on expansion, declining growth in compara-
ble store sales, unchecked costs, and increasing price competition cut pro¬ts to one
penny on every revenue dollar, leading to a $1 million loss on $436.6 million of revenues
for the retailer in ¬rst quarter 1993. In December 1993 CompUSA™s board replaced CEO
Morton with the then COO James Halpin.
In response to continuing losses ($16.7 million in FY 1994 on revenues of $2.1 bil-
lion) and a board mandate to focus on pro¬tability, CompUSA re-evaluated its strategy.
Computer users were no longer solely young, male, and technologically astute. Many of
these new computer buyers shied away from superstores intimidated by the bare bones
high-tech environment and “techie” sales staff that “talked down” to clients. CompUSA
addressed the market shift by balancing its classic technology-focused merchandising
with more consumer oriented, user-friendly displays and product mixes in its stores,
introducing devices like prepurchase product sampling. The ¬rm also improved the
responsiveness and ef¬ciency of its sales force. Additionally, CompUSA redesigned
3. James McConville, “All the Right Moves,” The Weekly Home Furnishings Newspaper, January 3, 1994.

4. Stephen W. Quickel, “The Bumpy Road Ahead for CompUSA,” Electronic Business Buyer, November 1993.
Case: CompUSA

Part 4 Additional Cases


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( 208 .)